Should term life insurance be based on your future earnings?

Planning for your family’s financial future can sometimes be difficult. The volatile nature of the stock market and uncertainty about employment can complicate your determination about how much life insurance you may need. It’s common for some individuals to purchase a life insurance policy based on how much they think they will earn in the future, but is that really a wise idea?

Most financial planners advise that the death benefit of a life insurance policy should be worth 10 to 12 times the insured person’s current annual income. If you have a good reason to believe that your income will increase significantly in the future, it’s not a bad idea to base your coverage off of that figure. This will allow you to possibly lock in lower rates now than you would be eligible for later.

Having an expectation that your income will increase in the future means more than just thinking you’ll get a raise or find a better job. In our current economic climate, making such predictions is risky. However, there are a few examples of people who are almost guaranteed to increase their income and would benefit from purchasing a life insurance policy based on future earnings.

Medical residents can realistically expect their income to at least double once they are able to practice as physicians. In addition, career public-sector employees who are eligible for promotions based on seniority will usually know what their salary will be five, 10 or 15 years from now, because this information is available to the public.

It is important to remember that the purpose of life insurance is to take care of your family in the event that something tragic happens to you. While you want to protect their future financial security, you also don’t want your life insurance policy to lapse because you never got that promotion and can’t keep up with the payments.

When considering how much coverage you need, you should think not only about your current income, but also the following:

Educational expenses – This can be a hard thing to predict, especially if your children won’t begin college for at least another decade, but you can estimate the cost of this by figuring out the average annual increase in college tuition.

Final expenses – At the very least, your family should have enough money to pay for a funeral and burial or cremation. This cost of this can range from $10,000 to $20,000.

Mortgage and other debts – Car loans, student loans, credit card bills and other forms of consumer debt can be a burden on survivors. Your life insurance policy should provide enough to pay off these debts entirely. A mortgage, however, may not necessarily need to be paid off, especially if the interest rate is low.

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